If I invest £5,000 in Lloyds shares, how much passive income would I receive?

Lloyds shares have skyrocketed 31% in a year and offer a dividend yield that’s higher than the average across FTSE 100 stocks.

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Lloyds (LSE:LLOY) shares have been a longstanding feature of my passive income portfolio. Throughout much of the past four years, the share price effectively flatlined. However, investors could count on juicy dividend payments to compensate for the lack of capital growth.

Times have changed. The black horse bank has delivered impressive share price gains thus far in 2024. Crucially, it also remains a top dividend stock in the FTSE 100 thanks to its index-beating yield.

So, how much passive income would I receive from a £5,000 investment in Lloyds shares today, and can the lender’s positive growth trajectory continue?

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Dividend income

Currently, Lloyds shares offer an income yield a touch above 4.9%. Thanks to the board’s progressive dividend policy and forecast dividend cover at two times projected earnings, the chunky payouts look set to continue. There’s a wide margin of safety here for potential investors.

If I had a spare £5,000 to invest, I could buy a whopping 8,474 shares at today’s price of 59p. Trading in pennies, Lloyds has the lowest share price among FTSE 100 stocks, so it’s possible to amass significant numbers of shares even with modest sums to invest.

At the current yield, this shareholding would produce £246 in passive income each year. That’s a tidy sum of extra cash for just a quarter of my annual Stocks and Shares ISA allowance.

Share price outlook

Turning to Lloyds’ share price growth prospects, I think it’s more of a mixed picture.

Starting with the positives, the valuation still looks cheap despite recent gains. A price-to-earnings (P/E) ratio of 8.4 is broadly in line with other FTSE 100 bank stocks and low compared to the wider index.

In addition, according to the Royal Institution of Chartered Surveyors (RICS), expectations for a rise in house sales have reached their highest level since before the pandemic. Strong levels of housing market activity is crucial for Lloyds as the UK’s largest mortgage lender.

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However, there’s another side to the coin. One key factor that could drive residential property transactions higher is a reduction in interest rates. Many City analysts anticipate the Bank of England will loosen monetary policy over the coming months.

I’ve noted this has potential benefits for the Lloyds share price, but it’s a double-edged sword. Falling rates will likely put pressure on the bank’s net interest margins and weigh on profitability.

Considering the lender’s first-half profits for FY24 slumped 15% to £2.4bn, it’ll be interesting to see how Lloyds responds to this challenge.

To add to the list of worries, shareholders are awaiting the results of an FCA investigation into car loans, which Lloyds is uniquely exposed to among major UK high-street banks. It’s set aside £450m for potential fines and compensation to borrowers, but some analysts estimate it could cost the lender up to £2bn.

What I’m doing

Overall, I think Lloyds shares look like a great investment to consider for dividend income. I’m less sure about the prospect of strong future share price growth.

I’m holding my shares for the passive income payouts, but I’m reluctant to buy more until I’ve seen concrete evidence of how Lloyds fares in what I expect will soon be a lower interest rate environment.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Carman has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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